The Last Dragon
Vietnam may become prosperous tomorrow, but is it ready for ASEAN today?

Beautiful Ha Long Bay, set along the dramatic northern Vietnamese coastline,
holds little allure for Alan Taylor, managing director of Australia's Bulk
Materials (Coal Handling) Pty. Ltd. Taylor's company was building an $ 11.1
million plant near there to process anthracite coal until Hanoi became concerned
the facility might be too close to a neighboring resort.

"If properly handled, this is the richest deposit in the world, with excellent
export potential," Taylor says. But even after the company obtained an environmental
clearance, the all-powerful Quang Ninh Province People's Committee changed
its mind about the plant's location. Ignoring pleas to the contrary, the
apparatchiks forced a relocation to Cau Trang that cost $ 15 million and
added $ 5 per ton to transport fees. The disruption delayed the plant's completion
by two years, with the opening now scheduled for this month.

For better and sometimes for worse, in the final weeks before joining ASEAN
in July, Vietnam is still mastering the complex skills of dealing with foreign
investors. To be a meaningful part of Asia's economic in-crowd, and attract
bigger investors, Vietnam has to get its act together, and soon. It must
realize that the prosperity it craves will not come from the small Asian
investors who dominate its economy today. Vietnam needs the big players to
create sustained growth, and the big players want to play by different, internationally
recognized rules. "Greater transparency will push the carpetbaggers out,"
says a U.S. lawyer. One Asian trader operating in Vietnam agrees: "We like
this opaque structure because we know exactly who to deal with and how. Once
the transparency that the multinationals want comes in, we'll be off to another
country."

Despite the obstacles in its path, Vietnam certainly has the vibrant feel
of an economy on the verge of a boom. Foreign investors pack its hotels,
cranes dot the urban landscape and advertising billboards proliferate after
decades of absence. Says Gary Voon, chief representative of Singapore's United
Overseas Bank in Ho Chi Minh City: "Vietnam is like Malaysia. It has oil
and gas, and energetic young people. It has a good chance to be the next
tiger."

But will it? How long will Vietnam and its "market socialist" economy take
to evolve into an investor's promised land? To be sure, Vietnam has 72 million
hardworking people. But it is naive to extrapolate the entrepreneurial vigor
of Ho Chi Minh City's 4 million citizens to the rest of the emerald Mekong
Delta, to the jagged terrain of the central highlands, or to the vast plains
in the north, where time, like Vietnam's bureaucracy, seems to stand still.

At a seedy Ho Chi Minh City bungalow, Singapore's United Land & Trading
Pte. Ltd. has plastered the peeling walls with framed panoramic "artist's
impressions" of office towers it hopes to erect in what is billed as a $
700 million industrial township in Anphu An Kanh. But the group has been
waiting nearly three years for State Committee for Cooperation and Investment
(SCCI) approval, without which investing in Vietnam is like throwing money
into the South China Sea.

The oil giant Shell International Petroleum Co. seems to be doing just that,
having spent $ 150 million drilling off Vietnam's southeast coast. While
three other companies have found some oil in Vietnamese waters, Shell hasn't
located a drop and is reassessing its exploration there. It has greater hopes
for the retail oil and gasoline market, since Shell had a 70 percent share
of the South Vietnam market before the 1975 reunification. How long might
it take before Shell gas stations dot the map again? "Perhaps 10 years,"
estimates Shell Vietnam General Manager Howard Gatiss.

New investors who want things done in 10 minutes are ill-advised to prod
snail-paced bureaucrats by reminding them of how smoothly such things run
in other countries. "Some Vietnamese have a frustrating reluctance to accept
good advice," says consultant Adrie van Gelderen of Business Alliance for
Vietnamese Education, a non-profit coalition of U.S. businesses helping devise
curriculum for Vietnamese schools.

Others are less charitable and call it "the Dien Bien Phu Syndrome," referring
to the climactic 1954 siege and bloody victory over an isolated French garrison,
which effectively ended that country's rule in Vietnam. One Vietnamese admits:
"We strut around like cocks because of thousands of years of fighting wars.
We think we don't have to listen to anybody."

Vietnam is justifiably proud of its history, of having rolled back Chinese
rulers, French colonialists and the U.S. military. But while major changes
are most often welcomed by younger leaders, even Vietnam's old guard is looking
ahead to advancement instead of back to its heroic, battle-scarred past.
The hero of Dien Bien Phu, Gen. Vo Nguyen Giap, told a rally: "My generation
washed away the shame of losing our country's independence, and now it's
your turn to wash away the shame of a poor and backward country."

Another obstacle to a smooth entry into the ASEAN way of life are the Stalinist
troglodytes in government who feel duty-bound to exert complete control over
the economy. Vietnam is changing, but it is evolving from a Soviet-style
collective system into a Nehruvian mixed economy: the India of yesterday,
where one needed permits and licenses to do everything.

There are ways to bypass that: One can find powerful local partners, disregard
the law or make under-the-table payments. But hotelier Steven Ng feels the
best way is to offer the right product. Ng ignored advice from his Singapore
friends to join the rush into Ho Chi Minh City and now runs the successful
and expanding Heritage Hotel on the outskirts of Hanoi. The right ventures,
right now, lie in areas where Vietnam has a shortage (hotels, office, commercial
and residential properties and business services), resources (agribusiness
and labor), or pressing needs (waste management and infrastructure, especially
telecommunications). For example:

Singapore's Keppel Corp., better known for ship repair, began by opening
a business center and later launched a mobile-phone network. It is now building
office towers and apartments. Keppel also runs Vietnam's biggest shipyard,
Keppel Bason Shipyard & Engineering Ltd. Says shipyard General Director
Wong Fook Seng: "With its long coastline and oil and gas reserves, Vietnam
can double its GDP (estimated at $ 16 billion for 1994) in no time with marine-based
industries."

Across the Saigon River on a 300-hectare plot, seven new companies have begun
to make plastics, towels, travel bags and other goods at the $ 89 million
Tan Thuan Export Processing Zone, Vietnam's largest private non-oil investment
so far. By the end of 1995 more companies should be operating, making floppy
disks, machinery and bicycles. Of the 200-odd lots available, 68 have been
taken up, all by Asians. The Taiwanese developers are already planning an
expressway and a nearby $ 242 million township called Saigon South.

Ho Chi Minh City generates 3,000 tons of garbage daily, much of it non-combustible
organic waste. "It is a crisis situation," says Anand Menon, director of
Far East Western Pte. Ltd., an affiliate of India's Western Paques Ltd.,
which plans to use its proprietary technology to convert the garbage to power,
while transforming the residue into fertilizer. The city will deliver half
its garbage to the company's yet-to-be-built $ 45 million plant.

Garbage treatment may not be glamorous, but it is profitable. In contrast,
some glamorous investments have yet to show any return. Take the Do Son casino,
set up by Tom Diep, an ethnic-Chinese Vietnamese. With backing from Macau
gambling tycoon Stanley Ho, Diep convinced the government that casinos are
like Robin Hood -- they fleece the rich to help the poor. But the plan has
failed so far. These days the casino sits virtually empty, its vacant roulette
and baccarat tables flanked by sullen staff awaiting customers.

For many investors, finding staff who can speak English and interact confidently
with foreigners is an expensive challenge. As employers chase a dwindling
pool of English-speaking Vietnamese, salaries have soared from $ 80 a month
to $ 500 a month. When a U.S. consulting company in Hanoi courted a graduate
Vietnamese working in the state sector, the candidate sheepishly admitted
he was too busy. As it turned out, the man was already moonlighting for a
foreign financial institution.

Like that employee, Vietnam is trying to catch up fast. But in their hurry,
officials are trying to do too many things simultaneously -- even conducting
their own market studies. Coca-ColaCorp. was not allowed to set up a Ho Chi
Minh City plant because local officials determined that the market was saturated.
An impartial consultant says: "If it is saturated, that should be Coke's
problem, not the bureaucracy's."

Vietnamese bureaucrats, not unlike their colleagues elsewhere, seem to be
intoxicated by power. Many issue contradictory decrees, sometimes overturning
approvals granted previously. In Ho Chi Minh City, for instance, a Western
developer building a premium office address was nearly forced to lop five
existing stories off the structure because it overshadows a nearby Party
headquarters (see box, page 27).

Asian investors' experience with bureaucratic idiosyncrasies has helped them
dominate the list of SCCI-approved projects, whereas Western investors, unfamiliar
with such terrain, remain understandably wary. Of the 1,000-some projects
cleared since Vietnam adopted the policy of doi moi (loosely translated as
economic rejuvenation) in 1986, some two-thirds are from Taiwan, Hong Kong,
Singapore, South Korea and Japan. The American trade embargo, lifted in February
1994, also made it difficult if not illegal for Western companies to do business
in Vietnam. At present, Taiwan is Vietnam's biggest investor.

Despite the lifting of the trade embargo, Americans are not yet there in
full force. Vietnamese-made products do not yet enjoy most-favored-nation
status, and U.S. companies cannot get export credits for Vietnam from the
U.S. Export-Import Bank. Also, memories of their humiliating war still prevent
many Americans from dealing objectively with Vietnam.

It is easy to see in that raw energy the seeds of a middle-class revolution.
But Christopher Bruton, a director of Dataconsult Ltd., a Bangkok-based consulting
company, cautions: "Talk of an impending boom in Vietnam is premature. You
have to be prepared to be in it for the long haul."

Bruton has a point. Advertising agencies grumble at regulations that change
like a Hanoi water puppeteer's sleight of hand. A puzzled diplomat asks:
"What is it that makes people think Vietnam will be the next tiger? It has
some potential, but it is a long, long way from getting there."

Seen from the bar of the Saigon Floating Hotel, the neon signs of Samsung,
Panasonic and Aiwa make it is easy to imagine a future Vietnam rubbing shoulders
with Singapore, Hong Kong and Malaysia. But at the next table a salesman
may well be explaining why that day could be a distant one. A Western telecommunications
company recently held an impressive signing ceremony to announce a Vietnamese
purchase of equipment, only to be asked by local Party members afterwards:
"Now how will you arrange the financing?" The perplexed salesman said: "I
just sold you the equipment; it is for you to arrange the financing." The
cadres replied, "But we have no money."

In the Vietnam of doi moi, laws are still being written and tested; and seasoned
businessmen try to make the most of every whisper of a deal. There is an
art to it. Says Indrajit Ghosh, managing director of JF Trading Co., part
of the $ 1.5 billion Bangkok-based G. Premjee Group, one of the world's largest
buyers of Vietnamese rice and coffee: "When you negotiate with the Vietnamese
you don't sit across the table; you sit with them. You see things from their
point of view. Then the rewards are enormous." JF Trading is developing property,
engaging in agricultural research, processing food and planning to make pharmaceuticals
in several country-wide ventures.

There is no dearth of deals in Vietnam. Consultants say provinces have hundreds
of projects for investors. But few are worth serious scrutiny. Mutual funds
scrounge around for opportunities, eagerly courting promising businesses
and zealously guarding their contacts (see box, page 30). Nonetheless, judging
from recent success stories, there are some promising opportunities. For
example:

Huy Hoang Co.: Cadre Le Van Kiem found his government paycheck lacking, and
in 1989 set up a garment factory with 580 workers in Ho Chi Minh City. Today
he employs 3,000 who earn about $ 60 a month making jackets that fetch $
250 each in German boutiques. Huy Hoang's sales hit $ 43 million last year.

Vinataxi Ltd.: Hong Kong's Allan Ho invested more than $ 2 million in 1992
to launch a radio taxi service in Ho Chi Minh City. Today his fleet has grown
almost six-fold to 170, raking in about $ 3 million last year.

Vinamilk: The state-run dairy is setting up an $ 18 million joint venture
with Ashta International Inc., a Hanoi-based investment company that receives
technical help from U.S. companies, to make dairy products for domestic consumption.

Though Vinataxi and Vinamilk are successful, few foreign investors are targeting
the local market. Says Robert Driscoll of the U.S.-ASEAN Business Council:
"Vietnam is not yet a market." It is an economy in which less than 1 percent
of the people earn more than $ 700 a year. But brand awareness is high. Cartons
of Panasonic and JVC products are displayed along streets like Ho Chi Minh
City's Huynh Thuc Khang, which overflow with televisions, VCRs and pirated
karaoke videos and CDs. Says Linh Nguyen, a New Zealander of Vietnamese origin
who returned to head the Vietnam operations of market research company Survey
Research Group (SRG): "Vietnam is undergoing a paradigm shift in lifestyle."

Still, there would seem to be an inconsistency in the presence of some 2.2
million Honda scooters retailing at $ 3,000 each in an economy where the
official and clearly understated annual per capita income is about $ 250.
Says Jan Standaert, general manager of SRG Vietnam: "Sure Vietnam is poor,
but the poverty is not worse than elsewhere in Southeast Asia. Each household
has two or three income earners. Electricity is cheap, education is free,
medical care is subsidized and rent is low. So the disposable income of each
household is high." Relatives who fled in 1975 for the U.S. as the North
Vietnamese Army marched into Saigon regularly send gifts or remittances,
swelling the economy by nearly $ 600 million a year. Says Yuji Miura, representative
of the Japan External Trade Organization: "The informal economy is moving
much faster than the formal sectors." All of that helps to give Ho Chi Minh
City a per capita income of nearly $ 810.

But beware of mirages. A cruel joke doing the rounds at bars has a foreign
banker, seeing a farmer being swallowed by a crocodile, exclaiming: "Vietnam
can't be poor. The people can afford LaCoste sleeping bags." According to
the World Bank, 51 percent of the people live below the poverty line, most
of them in the north.

To correct that imbalance, Hanoi encourages new investments north of the
17th parallel -- the former border that split the country -- to reduce the
dominance of Ho Chi Minh City. Investments in Vietnam's priority areas are
being approved faster than those elsewhere. Explains Shantanu Srivastava,
the Ho Chi Minh City-based regional director of Singapore's Namita Industrial
& Trading Concepts Pte. Ltd.: "Agribusiness, garment exports, light manufacturing
and other industries that can engage the rural poor and relieve the pressure
on land will succeed."

Vietnam may be approving selected foreign investments rapidly, but there
still remains a large gap between commitment and disbursement. Of the approved
investments totaling $ 11 billion cleared by the SCCI since 1986, less than
$ 4 billion has actually arrived, much of it in the oil and gas sector. Of
the committed aid of nearly $ 1.8 billion, less than $ 400 million has been
disbursed so far. But Bradley Babson, resident representative of the World
Bank Resident Mission in Hanoi, says: "Vietnam was not used to handling a
large number of large projects simultaneously, and the officials are learning
fast."

Considering the country's bridgeless rivers and erratic power supply; a creaking,
meter-gauge rail network; an airline that flies aging Russian Tupolevs lacking
spare parts; and egalitarian roads that give all creatures great and small
the right of use; Vietnam needs massive investments -- some say $ 20 billion
-- to improve its infrastructure.

Today, Vietnam is poised at the takeoff stage. Once a hyper-inflation-prone
country that depended on rice aid from India, it is now the world's third-largest
rice exporter, with an inflation rate that's enviably controlled. It has
so far succeeded in reforming its economy without the overheating of China
or the shock therapy of Russia. Predictions are that Vietnam will hold inflation
at 10 percent in 1995 while increasing GDP growth to 9 percent. Such macroeconomic
stability is a necessary condition for growth but not a guarantee.

The kind of growth that could transform Vietnam into a worthy member of ASEAN
will require an even more promising environment -- one that in five years
would allow market activity under globally recognized rules, and a level
playing field for Asian, Western and local players alike.

--

Funds and Games In Vietnam
Blue-chip equities are in scarce supply

These days it's relatively easy to assemble investors and set up a Vietnam
fund. The tough part is finding projects in which to invest.

Thus far, five funds have collectively raised more than $ 350 million from
international investors and are seeking equity in viable projects that could
be sold quickly on the yet-to-be-formed Vietnamese stock exchange. But the
number of projects that can satisfy international investors' standards is
small. It didn't take long for Philippe Colin, who manages the Dublin-listed
Beta Viet Nam Fund, to weed through and reject most of the 200-plus potential
projects considered for the fund, launched in August 1993.

Although the funds' holdings remain largely in cash rather than Vietnamese
equities, each listed fund is traded at a premium. Explaining this anomaly,
a banker says: "Some fund managers like to spice up their portfolio with
the glamour of emerging markets but also want the safety that cash offers.
The shortage of investible projects does not bother them."

While equities may be in short supply for Vietnam funds, there is certainly
a wealth of politics involved. For example, Hanoi refused to issue an entry
visa to William Colby, who wanted to attend a board meeting of a Vietnam
mutual-fund company. The reason: Colby's key role with the U.S. Central Intelligence
Agency during the Vietnam War. Back then, Colby ran the covert U.S. Operation
Phoenix, which killed nearly 60,000 Viet Cong operatives. Although Americans
are being welcomed all over Vietnam these days, Communist Party bosses in
Hanoi cannot bring themselves to forgive and forget the infamous Colby.

A former Colby acquaintance runs the Vietnam Frontier Fund. Nguyen Xuan Oanh,
former deputy prime minister of South Vietnam and now a Ho Chi Minh City-based
consultant, says his fund has placed $ 50 million in cash holdings.

Beta Viet Nam Fund has placed two-thirds of its $ 65 million portfolio in
cash. Colin says: "We have to be cautious, but the potential is bright. I
see some positive change every day." Beta Viet Nam has invested in Apex Dalat,
a knitwear factory; Vinataxi, Ho Chi Minh City's leading taxi operator; Bank
of Tokyo's restructured deutschemark loans to the Bank of Foreign Trade in
Vietnam and Iddison Vietnam Group.

At the Vietnam Fund, which, with a market capitalization of $ 75 million,
is traded at a steep 40 percent premium, Manager Chris Wijnberg is bullish:
"If the government gets out of some businesses and focuses its attention
on education, Vietnam will do extremely well; the prospects are excellent."
Its $ 25 million portfolio includes two respectable companies: garment-maker
Huy Hoang Co. and Maritime Bank.

Keppel Corp.'s $ 90 million Vietnam Investment Fund has pumped some of its
money into the property-development projects of Straits Steamship Land Ltd.,
a member of its own group. In contrast, Templeton Vietnam Opportunities Fund
is focusing its $ 104 million portfolio on overseas-listed companies that
have interests in Vietnam.

These funds will likely become lighter in cash when Vietnam opens its stock
market. But when will that be? Some say by the end of 1995; others say the
end of 1996. But does Vietnam really need a stock market so soon? Observes
Eugene Matthews, an American who runs the investment-consulting firm Ashta
International Inc.: "Vietnam has only so many officials in the Finance Ministry
and the State Bank of Vietnam. Does Vietnam need to divert those officials'
time, energy and resources to create a stock exchange that will keep six
international funds happy, or should it fix the problems that confront its
banking industry first?"

That is a question too troublesome for the fund managers now. Their bigger
concern is how to redeem their investments in the absence of stock markets.
As the U.S. military discovered, getting out of Vietnam is tough.